By Paul Feinberg
- A scholar of corporate finance, Professor Mark Garmaise designed his course for students to develop a deep knowledge of private equity markets and venture capital
- Garmaise places a premium on class participation, which encourages MBA students to develop their learning in real time
- Garmaise says he teaches entrepreneurs in the class what they need to know from a finance perspective
UCLA Anderson Professor of Finance Mark Garmaise is an award-winning instructor and respected authority on finance, venture capital and private equity. His primary research interests are in the areas of corporate finance, real estate, entrepreneurship and banking. For his Venture Capital and Private Equity course, Garmaise welcomes every Anderson MBA student who has taken the core finance class. “My favorite part of teaching is asking a student who doesn’t have the immediate answer a question, and then walking the student down the path until he or she achieves the ‘Aha!’ insight,” he says. “That’s a beautiful moment.”
Q: How do you introduce the Venture Capital and Private Equity course to students?
I begin by describing what venture capital and private equity are. They are stock (not bond) investments in companies that are not publicly traded.
Venture capital is invested in young, entrepreneurial and often high-tech firms. It’s now a major asset class and a very important first supply of capital to entrepreneurs. Buyouts are investments in larger, more mature firms, often accompanied by some debt. Entrepreneurial equity is the stock investments of entrepreneurs in their own firms. Together, I refer to these three asset classes as private equity. These markets have grown enormously in importance over the last 20 years.
Q: What are the goals you hope students will reach in this class?
I have two main goals for students in the class. The first is for them to develop a deep knowledge of private equity markets. The second is for them to advance their finance skills, to take the skills that they learned in previous finance classes and apply them in private equity. I want students to get really good at valuation, thinking about capital structure, using option pricing models — all those things.
I think that students who do not come from finance backgrounds are the ones who often benefit the most from the class. They might have to put in a little bit more work but, in the end, the benefit to them — the additional knowledge — is substantial. Those are the students who often come to me afterward and are most pleased with their experiences.
Q: In addition to being a teacher, you are also a scholar. Do you bring any of your own research into the class or, better asked, what source material do you use for the class?
It’s not a class that’s focused on academic papers. At the heart of the class are case studies. I supply the tools up front in lecture format, but the main approach of the course is for the students to undertake their own analysis of cases in venture capital and private equity. I ask them pretty open-ended questions, and it’s their job to figure out what’s going on by asking, “How can I apply these quantitative tools discussed in class to make sense of the business problems in the cases and to come up with recommendations?”
Q: Have you seen greater interest in this class over the years?
Yes, because there is increasing interest in venture capital. I think many students are interested in it because they either are or plan to become entrepreneurs, and they want to know how venture capitalists are thinking about it from the other side of the table. That is one big change. There’s just more interest in venture capital and how to raise it.
The other big change started happening after the financial crisis. Prior to that, we never had to convince students to take finance classes. Afterward, I think students began to question the need for finance classes. Finance instructors now need to make the value proposition clear, to make an argument for why students should take this class in finance. I appreciate that. I think that it is good discipline for instructors to always have a clear rationale for why students should take their course. It’s actually helped me sharpen my offerings and be clearer with students about my goals for the course.
Q: Is the class a blend of students who want to know how to raise money, but also students who want to be on the investor side instead of the entrepreneur side?
It is a mix consistent with the flavor of the Anderson MBA program. We look at both perspectives. We look at it from the perspective of the parties supplying capital as well as from the entrepreneur’s perspective. There’s maybe a little bit more weight toward students who are interested in the entrepreneurship side. But there are many students who might want to go into investment banking or potentially into private equity itself as investors, too.
Q: What are the nuts and bolts of the course?
Class participation carries a high weight in the overall course grade. That’s unusual for a finance class, but it’s very important to me because I want students to come to class prepared, to share their analyses, to walk me through their valuations.
There are case memos, too, and that’s another important component of the grade. But I think what’s most distinctive about the class is the heavy weighting that I put on class participation. And I don’t ask just one question. I’ll typically have several follow-ups. I really want to make sure students have a deep understanding. And if they don’t, then what? Then we’ll figure it out together. Then there’s a final exam. It’s a take-home case in which the students are asked to apply all the skills that they’ve developed during the course of the quarter.
Q: You place a lot of emphasis on class participation. How do you encourage it?
The way I manage it is through cold calling, which I think may be nerve-wracking for some students. But I think cold calling serves a number of important purposes. Number one, it lets everybody have a voice in the class, everybody will be called on. Number two, I think it encourages people to prepare. I expect them to prepare, and I want them to succeed. If people come to class having prepared, having worked hard on the case and on their analysis, the cold calling experience will be a very positive one. It’s a chance for students to develop their learning in real time.
Q: Is there any material difference between the version you teach for the full-time students and the one for the professional programs?
The main difference is, the full-time class is fully in-person and the EMBA and FEMBA versions are hybrid, with lectures online. How do I view the tradeoffs there? I think there is some value in having the instructor in the classroom to be able to ask questions. On the other hand, maybe there is some value in being able to watch the lectures whenever you want at the pace that you like. I view that as a matter of personal choice.
Q: What do you hope students know when they’ve completed the course?
I’m not claiming this class teaches an entrepreneur everything she needs to know. It’s meant to teach an entrepreneur the things that she needs to know from a finance perspective.
There are three major categories of skills that I focus on:
One is valuation. That’s important because any time you raise capital, you have to charge a certain price for it, right? You're selling shares or you’re borrowing from a bank and you have to figure out if they’re paying a fair price. It's crucial to know if the investors are paying a fair price, if they’re giving you the right amount of capital in exchange for the fraction of your firm that you’re surrendering.
The second component is more from an investor perspective, which is calculating returns and benchmarking returns. It’s a little bit more complicated in private equity because you tend to invest in a project, and then maybe make some money out of it. Then you’re investing again, in complicated streams of positive and negative cash flows. So, the return analysis is not simple. It can also be tricky to find the right benchmark: To what should we be comparing the realized returns in order to figure out if the investment was a success?
The third is to develop the ability to look at a term sheet and turn that into a financial model. And to understand what investors are asking and what the financial implications of that are, and to use more sophisticated models like option pricing models — to actually turn those term sheets into numbers and to quantitatively assess what is being asked when an investor proposes an investment in the firm. Those are the three big themes.